What is Depreciation?

There are two important terms involved in depreciation.

ACV = Actual Cash Value, &

RCV = Replacement Cost Value

Depreciation is the difference between the RCV and the ACV.

Depending on your specific insurance policy, the depreciation is either recoverable or non-recoverable.

Non-recoverable depreciation is the homeowner’s cost to bear.

Recoverable depreciation is paid by the insurance company after repairs are complete and if final repairs exceed the ACV payment.

Insurance policies pay ACV at the time of loss. If you have a Replacement Cost Value policy, your insurance carrier will then pay the claim in two (2) parts – the actual cash value and then the recoverable depreciation.

This follows the provisions of the insurance policy – which is a legal contract, dissuades from fraud and prevents excessive claims payments. It keeps everything fair while ensuring that a claim doesn’t get overpaid. Inflated claims are detrimental to everyone because it affects everyone’s insurance premium.

The most common way to apply depreciation is for your insurance company to consider an item’s useful lifetime, and reduce the item’s value by the same fraction of that lifetime each year until its value is zero. For example, if an item’s life expectancy is 10 year and the item is 5 years old at the time of the loss, then the depreciation is 50%. Want to understand more? Read our example of ACV on a TV.

ACV Policies

Some policies do not have Replacement Cost Coverage and only the ACV is allowed. These are called ACV policies. Therefore, the 1st insurance payment (after deductible) is the only check you will receive.

ACV policies should be avoided at all costs. The amount of money you save yearly for a reduced ACV premium is NOT worth the potential thousands of non-recoverable depreciation that you have to absorb should you experience a claim.

As of 2025, most insurance companies are changing their roof coverages to an ACV schedule. If your roof is 10 years old, or older than your depreciation is not recoverable.

The homeowner must pay this added cost to replace their roof.

You can read more about this by clicking on the button below.

ACV Trouble!

This is how to trouble happens: Your policy is ACV and hail totals your roof. The cost of the roof is $10,000 and 50% of the life expectancy of the roof is already gone.

$10,000 x 50% = $5,000

Fair enough? You pay half and the insurance pays half. WAIT. Your deductible . . .

$5,000 – $2,500 deductible = $2,500

Now to replace the roof, you pay $7,500 and insurance pays $2,500.

Don’t have an extra $7,500 laying about? Most of us don’t.

Here is the Rub

You maybe saved $100-300 a year by having an ACV policy and it is costing you $7,500 to have saved that amount on your insurance bill.

The mortgage company will REQUIRE you to replace the roof. The insurance company will REQUIRE you to replace the roof. And . . . you are $7,500 short to get it done.

You should always ensure you have replacement cost value on your insurance.

We are committed to keeping insurance claims fair and reasonable with local competitive pricing so that premiums stay affordable for the public.

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This blog is NOT legal advice. It is not insurance policy advice. You should consult and attorney and/or a licensed insurance agent for your specific situation.